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Get Ready for a Windows Price Cut

Only OEMs and smaller devices need apply.

Microsoft (NASDAQ:MSFT) Windows 8 and Windows RT aren't doing too hot right now. Consumer reception has been mixed at best, and the software giant has a lot riding on its new operating system platforms. What tricks does Microsoft have up its sleeve to turn the tide?

This can't be goodAsus, the No. 5 PC maker in the world, just conceded that overall "acceptance" of the new platform in the fourth quarter was not good, although the subset of touch-based laptops fared reasonably well. The OEM shipped 3 million tablets during the quarter, but only 5% of these were Windows devices, with the rest running Google (NASDAQ:GOOGL) Android. Of course, Asus builds the Nexus 7, which is one of the best Android tablets available right now, so some strength there is to be expected.

Samsung has now also decided to discontinue sales of Windows RT tablets in Germany due to weak sales. Pulling out of one of Europe's biggest and healthiest economies isn't a good sign for Windows RT's prospects across the pond. That comes just months after Samsung specifically said it wouldn't launch its Windows RT tablet in the U.S. because it felt it would need to do most of the "heavy lifting" when it came to consumer education. Even though Windows RT devices are cheaper than full-fledged Windows 8 ones, they also lack numerous features like legacy app support.

Let's make a dealWith Windows 8 and Windows RT struggling, one of the tools in Microsoft's arsenal is the good old price cut. According to The Wall Street Journal, Microsoft has begun offering price breaks to OEMs in order to motivate development. These discounts are specifically geared toward form factors with smaller displays, since those types of devices are expected to carry lower price points than larger PCs.

The hope is that cutting OEM licensing fees will similarly result in lower retail price points for consumers, which may spur adoption of the controversial platform. Microsoft has historically been hesitant to give price breaks to OEMs, but desperate times call for desperate measures. OEMs still account for roughly 20% of its product revenue mix.

Blasphemy!Microsoft reportedly offered OEMs a bundled deal of Windows 8 and Office for just $30, but only for touchscreen gadgets under 10.8 inches. That's a huge discount compared to the $120 that it normally asks. DIGITIMESseparately released a similar report, saying that Microsoft was offering a $20 discount in addition to including Office 2013.

The language isn't exactly clear, since the WSJ says that the licensing fee is $30, whereas DIGITIMES is pegging just the discount at $20. A $20 discount sounds much more reasonable than dropping the overall price by 75%. It feels blasphemous to say, but it would appear that DIGITIMES is more accurate than the WSJ.

Even if it's good, it's badThe whole situation illustrates the structural challenges that Microsoft faces in the mobile transition, even if it's able to gain traction in market share. The operating system licensing fees that it's built its business on are under pressure in the face of tablet adoption.

Apple's (NASDAQ:AAPL) iPad lineup now starts at $329 for the iPad Mini and $499 for the full-sized model, and most tablet rivals have had a hard time making a dent in iPad unit sales. Apple can charge more because it offers a differentiated package of integrated hardware and software. The OEMs that see any modicum of success prefer to use Android, as it's open source, and the royalties they end up paying Microsoft are still less than a Windows license would cost them.

On the low end, Amazon.com and Google have created consumer perception that small tablets of respectable quality should cost no more than $200, leaving little room for other OEMs to pay for Windows and still hope for margins. Even if Microsoft can spur OEM uptake, it's still looking at incremental revenue declines per license relative to what it's used to fetching for PCs.

Author

Evan is a Senior Technology Specialist at The Motley Fool. He was previously a Senior Trading Specialist at Charles Schwab, and worked briefly at Tesla. Evan graduated from the University of Texas at Austin, and is a CFA charterholder.